Weekend Reading – Focus on cashflow edition
Welcome to my latest Weekend Reading edition.
You can read my previous editions below:
More recently, the fighting inflation edition including how I intend to fight inflation using my portfolio.
Enjoy the following as part of Weekend Reading and I look forward to your comments!
Thanks again to Accidentally Retired for including yours truly in his FIRE/Financial Independence blogger survey stats and results. An interesting read…
Congrats to Tawcan who is clearly saving and investing a bundle this year.
Well done National Bank – “the only direct brokerage firm affiliated with a Canadian bank to have abolished commissions for all online trades on Canadian and US stocks and exchange-traded funds (ETFs).”
Given self-directed, DIY investing is constantly gaining more ground, I am appreciative that some banks are taking notice and action. That includes BMO when I profiled their free BMO InvestorLine adviceDirect Preview DIY platform here.
Dividend Daddy decided to interview himself recently. I enjoyed reading about how he is striving to figure out his retirement drawdown approach – maybe he should check out my brother-site Cashflows & Portfolios!!
I also run a great new site called Cashflows & Portfolios, a site dedicated to helping you manage your cashflow and portfolio wisely including any retirement drawdown plans.
After visiting the site, hit me up on our Contact page to find out more about our services. Because I’m not in the business of providing any direct financial advice, the cost of these services is well below what any financial advisor would charge! I/we do provide very detailed reports based on your facts, your data, that you can tailor for your own plan.
OK, that plug aside…I think Dividend Daddy is smart to consider the following:
“I’m also exploring potential draw down strategies and strategies related to avoiding sequence of return risk. Living off dividends at least early in any retirement is particularly attractive to me although structuring it is challenging given that some dividends/distributions rest in my RRSP. Perhaps being able to only pull dividends from my taxable account for a period of time might work since most of my dividends come from my taxable account?”
On that note, check out this Cashflows & Portfolios post about managing sequence of returns risk as part of any drawdown strategy.
Focusing on cashflow in retirement
Interesting read from Christine Benz at Morningstar recently. She wrote about focusing on your cashflow needs (vs. income replacement). I guess I have a bias – I’ve always been a fan of cashflow for my semi-retirement plan – it’s one of the main reasons why most of my portfolio is invested in income-producing equities.
Here is a punchline from that Morningstar article in case you get hung-up on the original paywall like I did!
“Confusion over income-replacement rates–combined with huge variations in actual income-replacement needs among different cohorts–highlights why I think most pre-retirees should bypass income-replacement rates and instead use their expected cash flow needs to help determine how much money they’ll need in retirement.”
I wrote about some ways to determine your financial independence number here, considering your cashflow needs and expenses.
In the Morningstar article, I would agree with most of the ways mentioned with some exceptions:
1. Start with today’s expenditures – yes, but I would also consider inflationary costs as well, especially any basic needs. Things cost more over time.
Check out my Weekend Reading – Fighting inflation edition here.
2. Consider housing changes – yes, but then again, downsizing may or may not be in your plans and besides, housing is not the only thing killing your retirement plan. Consider transportation costs where you live as well.
3. Factor in anticipated lifestyle changes – absolutely!!
4. Add in higher healthcare costs – absolutely, including long-term care needs for multiple years.
5. Add a Fudge Factor – indeed but be mindful that no two (2) personal finance plans are the same and what works for others may or may not work for you. I do believe that one universal truth is the consideration to keep an emergency fund/some cash on hand during retirement to navigate any short-term unexpected needs. If you want to use a Line of Credit for that, fine, but my preference is to not borrow money unless needed. This is especially true if you’re no longer working. Your mileage may vary…
How am I going to generate cashflow in retirement?
I know I’ll write about this more, including updating some older content to share my current thinking but in short:
- I will likely have some part-time work in semi-retirement in a few years, to help me with the transition away from full-time work.
- I will have a (higher?!) taxable account dividend income stream to lean on. I’m optimistic that taxable account income stream will cover my condo fees and property taxes – for life.
- I will have some early retirement RRSP withdrawals – likely just “living off dividends” in the early years to avoid aforementioned sequence of returns risk. Living off dividends and distributions from strategic RRSP withdrawals should cover most other expenses such as food and some discretionary spending.
Beyond that, I will of course have some cash set aside for major expenses and/or to ride out poor stock market returns.
I wrote about my cash wedge concept before and I will expand on that post in future weeks I think because I’m getting lots of reader questions about my approach.
Essentially, a cash wedge can be any combination of the following in my book:
- A cash wedge of cash savings and little bonds or no other fixed income.
- A cash wedge of cash savings, some fixed income in the form of bonds or Guaranteed Investment Certificates (GICs), and/or
- A cash wedge of cash savings, GICs, bond ETFs or simply bonds as part of a balanced portfolio (of stocks and bonds).
Either way, you can see a common denominator of the cash wedge approach is simply to have some cash savings in retirement – ideally ample amounts of it for a few reasons…
Thoughts on the cash wedge approach? Thoughts on my desire to focus on cashflow in retirement?
More Weekend Reads…
Personal finance writer Miranda Marquit received Bitcoin as compensation for an article in 2011. Here’s what’s happened since then.
Good take from How To Save Money on fixed vs. variable rates.
Dale Roberts was back to make sense of the markets this week.
Reader commentary of the week…
While I have a few emails in my inbox to get to, for future Weekend Reading editions, I thought it would be interesting to post this set of reflections from a reader shared with me in June. Food for thought as to what other readers think about!
I took some liberties with the content, not much though 😊
Thanks for sharing all your useful finds. Let me share another snippet of information, based on recent experiences which may be useful repeating / incorporating in a future message to your readership.
Some of us – due to unavoidable family and career circumstances – end up with a plethora of Registered Accounts (RAs). I read this article:
Between my wife and I, we ended up with seven RAs, not counting TFSAs. These seven were a mix of PROVINCIAL and FEDERAL LIRAs, two “regular” RRSPs, one for each of us, and a spousal RRSP. Early on, this did not seem to be a big issue, but when you look at costs and position size inefficiencies (commissions increase when the same trade has to be done in different accounts), it becomes clear that consolidation is also a useful objective.
Then, it gets trickier. As you know, the LIRAs can be partially consolidated into the RRSPs for 50% of their respective values BUT ONLY upon conversion of those LIRAs into LIFFs.
(Other reading: What is a LIRA? How should you invest in it?)
That does not reduce the number of accounts yet, but it is a worthwhile step towards overall consolidation.
While deferral of any RA withdrawals MAY make sense and most financial institutions promote it, the eventual mandatory withdrawals will impact on OAS entitlement and taxes. There are also survivorship concerns as well.
(Other reading: Survivorship benefits for CPP and OAS)
DEPENDING on personal circumstances, it may well be useful to consider maximizing and possibly starting EARLY the depletion of LIRAs, for final consolidation into the RRSP which by that time may have become a RIF (Retirement Income Fund). If one seeks an early retirement, the eventual core account RRSP / RIFF should be depleted (in my opinion) assuming the LIFs go first and fastest.
Now, some bank advisors are either unaware or otherwise disinclined to offer advice in this area. At one institution, the “authorized professional ” even ducked the question about the threshold for final consolidation “you need to consult your accountant”. Some places are certainly better than others…
My point is, it seems that the main beneficiary of the account restrictions is the Financial Industry, they benefit from forced inefficiencies imposed on their clients.
Over to you.
What an outstanding email. I agree with most of this and my reader’s considerations, including account consolidation.
I know when it comes to our financial plan, we are thinking about LIRA unlocking (50%), killing off LIRA soon/first, and also spending our RRSP assets early in semi-retirement in order to keep TFSA assets “until the end” with our Canada Pension Plan (CPP) and Old Age Security (OAS) benefits. Of course, with any upcoming federal election when it comes to the TFSA, I feel all past promises and bets are off.
Time will tell!
Enjoy your weekend!